Things are shaping up for homebuilders. In fact, one big name in the industry is projecting that 2024 will mark the “golden age” for homebuilding, thanks to falling mortgage rates and frozen existing home supply, among other factors.
David O’Reilly, CEO of megalith developer Howard Hughes Corp., told CNBC last week, “We’re going to have the golden age of new home construction” in 2024, even calling the new home market “extraordinary” in its current form.
He’s not wrong: Homebuilding activity has surged in recent months. In November, single-family starts jumped 18% over October.
Starts have now increased steadily for four consecutive months, and experts are predicting further increases in new home construction in the new year.
Why Homebuilding Will Surge in 2024
The National Association of Home Builders projects a 4% increase in starts across 2024, while Lawrence Yun, chief economist for the National Association of Realtors, is calling for a 13.5% increase in new home sales in the new year.
The bump largely boils down to mortgage rates, which have fallen quite a bit from their near-8% peak in October. Now at just 6.61%, average rates on 30-year mortgages are at their most affordable point in over six months.
The problem? It’s still not enough to spur existing homeowners to put their homes on the market. According to Zillow, as of July, about 80% of homeowners have an interest rate of 5% or less—so most property owners are not looking to trade in those low rates for today’s much higher ones (unless they absolutely have to). This constrains the supply of existing housing and pushes more buyers toward new construction instead.
There’s another perk buyers get with new homes, too: builder-offered buydowns. According to NAHB, 29% of homebuilders offered mortgage rate buydowns to buyers in October, and another 21% absorbed financing points for buyers, allowing them to essentially get lower rates completely free of charge.
O’Reilly told CNBC: “Not only can you pick size, location, but national homebuilders have been able to buy down mortgage rates and offer a lower mortgage rate for buyers.”
According to O’Reilly, builder buydowns range anywhere from 150 to 200 basis points, essentially letting buyers drop their rates from today’s 6.61% to a rate closer to 5% or below. On a $400,000 loan, that would mean a difference of about $500 in monthly payments.
A Continued Upper Hand
These aren’t flash-in-the-pan conditions, either. In fact, builders are likely to keep the upper hand as we move through 2024.
While the Federal Reserve is largely expected to cut rates next year—meaning mortgage rates will likely follow suit—most experts don’t expect rates to drop by any drastic amount. The Mortgage Bankers Association (MBA) currently predicts an average 30-year rate of 6.1% by year’s end, while Fannie Mae sees a 6.5% average at the close of 2024.
Even at the MBA’s more optimistic number, most existing homeowners would remain locked into their current low mortgage rates, squeezing existing housing supply and pushing buyers toward new construction—and the potentially lower rates they can offer.
As O‘Reilly puts it: “That supply-demand imbalance [in the existing home market] should get worse into 2024, driving demand for new home construction.”
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.